Depreciation Recapture: What Happens When You Sell Business Assets (Sections 1245 and 1250)

Depreciation recapture is the tax rule that “takes back” the tax benefit of depreciation when a business asset is sold for more than its depreciated value. When a business claims depreciation (including Section 179 and bonus depreciation), the asset’s tax basis decreases. If the asset is later sold for more than that reduced basis, the gain attributable to the depreciation is “recaptured” and taxed at ordinary income rates, not the lower capital gains rate. This recapture often surprises business owners who assumed the entire gain on a business sale would be taxed at capital gains rates.

How does recapture work on Section 179 equipment?

Can I spread the gain from a business sale over multiple years?

If the buyer pays in installments, you can report the gain proportionally under IRC 453 as you receive each payment. The installment method applies automatically to any sale where at least one payment is received after the tax year of the sale. Each payment consists of three components: return of basis (tax-free), gain (taxed at capital gains rates), and interest income (taxed as ordinary income). Dealer dispositions, sales of inventory, and sales of depreciable property to a related party don’t qualify for installment treatment. If you elect out of the installment method (by reporting the full gain in the year of sale), you cannot reverse that election without IRS consent.

How are long-term and short-term capital gains taxed differently?

Short-term capital gains (assets held one year or less) are taxed at ordinary income rates, which can be as high as 37%. Long-term capital gains (assets held more than one year) are taxed at preferential rates: 0%, 15%, or 20% depending on your taxable income. The 3.8% net investment income tax (NIIT) applies on top of both rates for taxpayers with modified AGI above $200,000 ($250,000 married filing jointly). The holding period is critical for tax planning: selling an asset one day before the one-year mark costs you the rate differential, which can be 20+ percentage points. Installment sales under IRC 453 can spread the recognition of gain over multiple years.

Does holding equipment over a year avoid recapture?

No. Section 1245 recapture is ordinary income whatever the holding period, so gain up to the depreciation you took on equipment or vehicles is taxed at regular rates, up to 37% for 2025 and 2026. Holding more than one year only matters for gain above the recapture amount, which is the part that can reach long-term rates.

For business property, gain left after recapture goes through section 1231. If your 1231 gains beat your 1231 losses for the year, the net is treated as long-term capital gain and taxed at 0%, 15% or 20%. That net gain is ordinary, though, to the extent of unrecaptured net 1231 losses from the five prior years. Buildings follow a different rule: section 1250 only recaptures depreciation beyond straight-line, and the straight-line part becomes unrecaptured section 1250 gain, taxed at a maximum 25%.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.